Are You A Candidate For An Offer In Compromise?

Are You A Candidate For An Offer In Compromise?

Many of you have seen or heard the ads on television or radio promising to settle your IRS back taxes for pennies on the dollar with the use of an Offer in Compromise (OIC).

While an OIC can be extremely helpful in settling back taxes, a thorough analysis must be performed to determine whether you are a good candidate for the program and the extent of your possible tax savings. At East Coast Tax Consulting Group we always conduct such an analysis before recommending you submit an OIC to resolve your IRS tax problems.

The amount of your offer is dependent upon (1) the equity in your assets, (2) the excess of your monthly income over allowable expenses, and (3) the time period over which you will pay your offer.

Generally, the IRS values your equity in property at “quick sale value” minus any debt which encumbers the property. Quick sale value is typically 80% of a property’s value.

You are allowed the full IRS standard for FCM and OPM even though you have spent less. All other allowable expenses must be substantiated and are limited to the IRS standard except under special circumstances. Some expenses such as medical insurance, court-ordered payments, and federal, state and local income taxes and FICA taxes are generally allowable without limitation.

You can pay your offer in five or fewer installments within five months of acceptance (Lump Sum Cash Offer) or within twenty four months of submission of your offer (Periodic Offer). A lump sum cash offer requires you to make a 20% nonrefundable payment with your offer.

In determining the amount of excess income to be included in your offer a multiple of twelve is used in a lump sum cash offer, while a multiple of twenty four is used in the periodic offer.

The following examples are provided to give you a better understanding of how an offer amount is calculated and whether you may be a candidate for the OIC program.

The couple owns a home in Wantagh, NY where they live with their two young children. The home is worth $400,000 and has a mortgage of $325,000. Taxpayer A is employed and earns $120,000 a year. His wife does not work as she takes care of their children.

For offer purposes the taxpayers do not have any equity in their home as the quick sale value of $320,000 ($400,000 X 80%) is less than the mortgage of $325,000.

The taxpayer’s actual monthly expenses are as follows:

Housing and Utilities-$3,400

Food, Clothing, Miscellaneous-$1,900

Taxpayer A’s car lease$ 525

Wife’s car lease $300

Taxpayer A-operating costs of car-$400

Wife-operating costs of car-$300

Health Insurance-$550

Term Life Insurance-$50

Charitable Contributions-$50

Income taxes/FICA taxes-$2,000

Other-$525

The offer amount is calculated below:

Monthly Income

Monthly Expenses

Actual

IRS Standards

Allowable

Wages

$10,000

Food, Clothing, Misc.

$1,900

$1,465

$1,465

Housing and Utilities

3,400

3,891

3,400

Vehicle #1 Ownership/Lease Costs

525

517

517

Vehicle #2 Ownership/Lease Costs

300

517

300

Vehicle #1 Operating Costs

400

342

342

Vehicle #2 Operating Costs

300

342

300

Health Insurance

550

550

Out of Pocket Health Care Costs

–

240

240

Life Insurance

50

50

Taxes (Federal, State, Local, FICA)

2,000

2,000

Total Income:

$10,000

Total Living Expenses:

9,164

Total Available Monthly Income:

$ 836

OFFER AMOUNT

Lump Sum Cash

Periodic Payment

Remaining Monthly Income

$ 836

$ 836

x12

x24

10,032

20,064

Plus Total Equity in Assets

–

–

Offer Amount

$10,032

$20,064

The lump sum offer of $10,032 and periodic payment offer of $20,064 represent potential tax savings of approximately $80,000 and $70,000, respectively. You can see that charitable contributions and other personal expenses incurred by the taxpayers are not allowed in computing the offer amount, thereby increasing the required payment.

The taxpayers in this example are able to borrow the money needed to fund their offer and thus are good candidates to resolve their IRS back taxes with an Offer in Compromise.

Example 2

Taxpayer B is single and lives in Ft. Lauderdale, FL, where he rents a condo on the Intracoastal. He owes the IRS $30,000 in back taxes and the remaining statute of limitations on collections is six years. Taxpayer B earns $70,000 a year and has no assets other than his personal belongings.

His monthly living expenses are as follows:

Housing and Utilities-$2,000

Food, Clothing, Miscellaneous-$1,000

Car Lease-$500

Operating costs of car-$400

Income Taxes/FICA Taxes-$1,600

Other-$400

Health insurance-$100

The offer amount is calculated below:

Monthly Income

Monthly Expenses

Actual

IRS Standards

Allowable

Wages

$ 5,833

Food, Clothing, Misc.

$ 1,000

$ 583

$ 583

Housing and Utilities

2,000

1,833

1,833

Vehicle #1 Ownership/Lease Costs

500

517

500

Vehicle #1 Operating Costs

400

346

346

Health Insurance

100

100

Out of Pocket Health Care Costs

–

60

60

Taxes (Federal, State, Local, FICA)

1,600

1,600

Total Income:

$ 5,833

Total Living Expenses:

5,022

Total Available Monthly Income:

$ 811

OFFER AMOUNT

Lump Sum Cash

Periodic Payment

Remaining Monthly Income

$ 811

$ 811

x12

x24

9,732

19,464

Plus Total Equity in Assets

–

–

Offer Amount

$ 9,732

$19,464

The lump sum offer of $9,732 and periodic payment offer of $19,464 represent potential tax savings of approximately $20,000 and $10,500, respectively. The taxpayer in this example is able to borrow the money needed to fund his offer. Looks like another good offer candidate. Not so fast! The taxpayer’s excess monthly income is sufficient to fully pay his outstanding taxes over the remaining statute of limitations including any additional interest and penalties. Therefore, the IRS will not accept his offer, but would require the taxpayer to enter into an installment agreement.

Although an Offer in Compromise can help struggling taxpayers resolve their IRS tax problems, an extensive analysis of each taxpayer’s situation must be performed to determine if it is the proper resolution for the taxpayer.

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Sal Bochicchio is a licensed CPA focusing primarily on tax problem resolution and audit defense services. He holds the designation of Certified Tax Resolution Specialist awarded by the American Society of Tax Problem Solvers and has been successfully providing tax representation services including Audit Representation, Tax Levy & Lien Release and much more for over 30 years to individuals and businesses throughout Florida and elsewhere throughout the country from his Boca Raton office.